What Is GST & It's Impact On Real Estate

Goods and Services Tax (GST) is an indirect tax (or consumption tax) used in India on the supply of goods and services. It is a comprehensive, multistage, destination-based tax. Multi-staged as it is, the GST is imposed at every step in the production process, but is meant to be refunded to all parties in the various stages of production other than the final consumer and as a destination-based tax, it is collected from point of consumption and not point of origin like previous taxes.

At the 33rd GST Council Meeting held on 24th February 2019, new GST rates were introduced for residential real estate which came into effect from the 1st of April 2019. The new GST rates on residential real estate transactions have been proposed as follows:

> GST to be charged at 5% without Input Tax Credit (ITC) on residential properties that are not part of the affordable housing segment.

> GST to be charged at 1% without ITC on residential properties that are included in the affordable housing segment.

GST on real estate in case of under construction properties is 12%. GST does not apply to sale of completed properties or to the resale of old properties. Builders receive input tax credit on the materials purchased from suppliers/contractors and under the current GST structure, were expected to pass it on to home buyers. However this has not happened so far. As a result there may be changes in the GST regime with respect to real estate in the future. Real Estate has historically been a preferred investment choice for many Indians and the sector has been driven to a large extent through investments made in the residential property segment. A joint report from JLL and CREDAI (Confederation of Real Estate Developers’ Associations of India) has estimated that housing sector investments in India since 2014 amounted to Rs. 59,000 crore and accounted for approximately 47% of the total investments in the sector with projections indicating further increase in the coming years.

Impact on the first time home buyers: Under the earlier tax regime, buyers had to pay VAT, Service tax, Registration charges & Stamp duty on purchase of properties under construction. Also since VAT, Registration charges & Stamp duty were state levies, prices of properties varied from state to state. Moreover, developers had to pay various duties like sales tax (CST), custom duty, OCTROI etc. for which credit was not available. Under GST, a single tax rate of 12% is applicable on properties under construction while GST is not applicable on completed or ready to sale properties which was the case in previous law. Hence buyers will benefit from reduction of prices under GST.

In the short-term, buyers may stick to the “wait and watch” approach to gain more understanding on the impact of GST on property prices and defer buying decisions. Also, in the long term, GST will have a positive impact on buyers if the benefit of input tax credit received by the developer is passed on to the buyer.

Impact on the developers: Under the previous tax regime, developers had to bear Excise duty, VAT, Customs duty, Entry taxes etc. on raw materials / inputs and Service tax on various input services like approval charges, architect professional fees, labor charges, legal charges etc. ITC was not available for duties like CST, Customs duty, Entry Tax etc. This would impact the pricing and subsequently the burden was transferred to the buyer.

Under GST, developers’ construction costs are significantly reduced as multiple taxes are subsumed and due to the availability of input tax credit. Also, reduction in cost of logistics will be an added benefit. Hence developers may see improvement in margins. On the downside, developers have to do multiple calculations to arrive at ITC in order to pass it on to the buyers. Hence, in most cases, they can pass on the ITC only during the final stages. This lack of transparency on ITC, may affect the developers since buyers may resort to the “wait and watch” approach and defer buying decisions. And, in the erstwhile laws, a large portion of expenditure remained unrecorded in the books. Under GST, availability of credit on inputs and cloud storage of invoicing has reduced under recording of expenditure.